US central bank chief rebukes Trump over plan to lift regulations

Donald Trump has been rebuked by the US central bank chief, Janet Yellen, for planning to scrap tough banking regulations that made the system “substantially safer” and did nothing to restrict growth or lending.

“Already, for some, memories of this experience may be fading – memories of just how costly the financial crisis was,” she said.

“The core reforms we have put in place have substantially boosted resilience without unduly limiting credit availability or economic growth.”

The president, who has vowed to “do a big number” on the Dodd-Frank law at the centre of banker complaints, is backing calls from executives on Wall Street and Republicans in Congress for looser financial regulations to spur growth.

In February, he said: “I have so many people, friends of mine, that had nice businesses. They can’t borrow money. They just can’t get any money because the banks just won’t let them borrow it, because of the rules and regulations in Dodd-Frank.”

The Treasury secretary, Steve Mnuchin, a former Goldman Sachs banker, has said a sustainable growth rate above 3% a year can be achieved once banks are relieved of the shackles imposed on them by Dodd-Frank.

In June, he proposed reducing the powers of the main consumer watchdog, the Consumer Financial Protection Bureau, weakening the Fed’s oversight of large financial institutions and looser mortgage lending rules.

The Dodd–Frank Wall Street Reform and Consumer Protection Act was signed in 2010 by the then president Barack Obama in response to the financial crisis. It brought in hundreds of new regulations including tougher consumer lending rules and the need for banks to hold bigger capital reserves.

Yellen said: “The evidence shows that reforms since the crisis have made the financial system substantially safer. Reforms have boosted the resilience of the financial system. Banks are safer.

“[The changes] resulted in a return of lending growth and profitability among US banks. Material adverse effects of capital regulation on broader measures of lending are not readily apparent.”

Some changes to individual regulations may be warranted, Yellen said, and she mentioned the possible relaxation of the Volcker rule preventing banks from using their own funds to trade shares. A further relaxation of rules that apply to medium-sized and smaller banks could also be part of limited reforms.

But overall, she said, “any adjustment to the regulatory framework should be modest and preserve the increase in resilience” in a financial system she said was now better able to weather future shocks.

The speech in Wyoming could be Yellen’s last as Fed chair. Her four-year term comes to an end next year and it is not clear whether Trump will reappoint her or she would want to continue in the role.

Trump has already nominated a new Fed vice-chair of financial supervision, Randal Quarles, who has signalled an appetite to lessen the burden of regulation.

There has been much speculation in Washington that a failure to renew Yellen’s contract would be another step on the road to looser regulation.

Most central bank watchers were keen to hear Yellen’s views on the likely path of interest rates, but there was no mention of when the next increase may be or the debate raging inside the Fed over the path of rates in the next few years.